Select Energy Services, Inc. — Q3 2021 Form 10-Q
Period: Three and nine months ended September 30, 2021. The filing identifies the registrant as Select Energy Services, Inc. (NYSE: WTTR). Amounts below are in U.S. dollars; financial statement amounts are converted from thousands to millions.
Business context
The company provides water-management services and infrastructure, and oilfield chemical products and services to the U.S. oil and gas industry. Its three reportable segments are Water Services, Water Infrastructure and Oilfield Chemicals.
Financial performance
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Revenue | $204.6 million | $101.2 million | $509.5 million | $471.8 million |
| Gross profit (loss) | $9.0 million | $(16.9) million | $3.0 million | $(25.3) million |
| Gross margin | 4.4% | (16.7%) | 0.6% | (5.4%) |
| Operating loss | $(13.8) million | $(34.2) million | $(57.2) million | $(372.8) million |
| Net loss | $(14.2) million | $(36.3) million | $(61.2) million | $(380.5) million |
| Adjusted EBITDA (non-GAAP) | $15.1 million | $(4.7) million | $23.6 million | $10.7 million |
Q3 revenue more than doubled year over year as activity recovered from the pandemic-related downturn and the Complete acquisition contributed to Water Services and Water Infrastructure. Revenue rose in all three segments: Water Services $112.5 million, Water Infrastructure $36.8 million and Oilfield Chemicals $55.4 million. Nine-month revenue increased 8%; Water Services declined 2.5%, while Water Infrastructure and Oilfield Chemicals rose 20.9% and 20.8%, respectively.
The nine-month net loss improved substantially, primarily because the prior-year period included $276.0 million of goodwill and trademark impairment and $7.9 million of property and equipment impairment and abandonment charges. Q3 net loss attributable to Select Energy Services, Inc. was $12.0 million, or $0.14 per Class A share; the comparable loss was $30.5 million, or $0.36 per share.
Cash flow, balance sheet and liquidity
- Nine-month operating cash flow was negative $13.9 million, compared with positive $119.8 million in 2020. Management attributed the decline chiefly to the prior-year working-capital release and higher receivables associated with increased activity and acquisition integration.
- Nine-month investing cash outflow was $45.3 million, including $18.6 million for acquisitions and $29.9 million of property and equipment purchases. Financing cash outflow was $2.5 million.
- Cash declined to $107.4 million at September 30, 2021 from $169.0 million at year-end 2020. Current assets were $356.3 million and current liabilities $112.2 million.
- The company had no borrowings under its $300 million revolving credit facility. Availability was $124.8 million at quarter-end, after $15.6 million of letters of credit; the borrowing base was $140.4 million. It reported compliance with debt covenants.
- Total liabilities were $199.2 million, including operating lease liabilities; the filing reports no bank debt outstanding. The facility matures November 1, 2022, and management intended to extend it or arrange a replacement before then.
Material developments, outlook and risks
- On July 9, the company acquired Complete Energy Services for $34.5 million, including 3.6 million Class A shares and $14.2 million cash. On August 2, it acquired UltRecovery for $2.5 million cash plus an estimated $1.1 million earn-out liability. Purchase accounting valuations were preliminary.
- On October 1, after quarter-end, it acquired Agua Libre and other Basic Energy Services water-related assets for preliminary consideration of $19.9 million, including $15.2 million cash, 902,593 shares and assumed liabilities. Management believed the acquisition could be accretive but cautioned it could not be certain.
- Management said cash, operating cash flow and available revolver capacity were expected to provide sufficient liquidity for at least the next 12 months. No specific earnings or revenue guidance was provided.
- Management cited higher oil and gas prices and improving customer financial health, while noting uncertainty around COVID-19, customer spending, commodity prices and industry consolidation. Efficiency gains and shorter wellsite activity may reduce revenue opportunities for certain day-rate services; rising raw-material and fuel costs may pressure margins.
- February 2021 severe weather and extended raw-material shortages were estimated to have reduced nine-month revenue by $9 million to $12 million. Rising raw-material costs also weighed on Oilfield Chemicals margins, with management expecting to pass increased costs on to customers.
- The company was constructing and upgrading produced-water recycling facilities. It expected total centralized Permian recycling capacity to reach approximately 375,000 barrels per day when projects were fully operational; projects were supported by customer contracts and significant planned infrastructure investment.
- Other notable items include $3.2 million of nine-month severance related to the former CEO, $6.0 million of deferred 2020 payroll taxes due for repayment in installments by December 2021 and December 2022, and a resolved Clean Air Act matter for which final payments of $2.6 million were made in April. Management did not expect pending ordinary-course litigation to have a material adverse effect.
Important facts for investors to verify
- Whether operating cash flow recovers as receivables are collected and acquisition-related working capital is integrated.
- Actual margins and cash generation after raw-material, fuel and labor cost changes, and whether price increases offset inflation.
- Integration results and final purchase accounting for Complete and UltRecovery, and the performance and financing effects of the post-quarter Agua Libre acquisition.
- Progress, capital costs, customer volumes and returns from the recycling facilities and related infrastructure projects.
- Availability and terms of a credit facility extension or replacement before the November 2022 maturity, alongside covenant headroom and liquidity needs.
- The filing’s non-GAAP Adjusted EBITDA measure and its adjustments; it is not a substitute for GAAP results or cash flow.